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Buying on layaway

Mobile and apps may be the future of shopping but some retailers have returned to an old-school method just for the holidays: the layaway.

Shoppers are hitting the peak of the holiday buying season and are looking to find the perfect gift. Cost remains top of mind but sometimes that must-have item falls outside the gift-giving budget. Layaway gives shoppers a way to buy an item without having to put it on a credit card.

While a popular shopping option in the 1980s, layaway disappeared almost ten years ago thanks to an increase in credit card ownership. But Walmart, Sears and other Canadian retailers are offering layaway options for a limited time during this holiday season. It's already been a boon for retailers; according to the Wall Street Journal, Sears has seen an increase in TV and camera sales as a result of offering layaway.

But is it a better way to shop than with credit cards? Maybe, but only if you plan ahead.

How layaway works
The retailer agrees to hold or reserve an item for a customer for a set period -- usually a month or 90 days -- in return for the customer paying for the item in installments. Sometimes the customer has to pay a fee or a percentage of the cost of the item. Only when all payments have been made in full does the customer get to take the item home.

Shopping using layaway seems to make sense but it can cause problems if you're not careful. Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada, Inc. says, "If you have the money then buy it [outright]. That's the first choice if you can do that." If that's not possible, Schwartz says there are some advantages to using layaway.

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"You're paying for the item in full before you get the item and that's important because in many cases you could buy it on a credit card and pay for a portion of it through minimum payments and go bankrupt," says Schwartz. "[Layaway] can solve some of the biggest problems consumers have around credit cards [as] they're not paying for it for 20 to 30 years just because they're only making the minimum payments. They have to pay it [in full] by a certain amount of time before they can take the goods and there is no more responsibility beyond that."

He adds, "The other thing is you're making scheduled payments so [consumers] have to be disciplined enough to make sure they have that money set aside so they can eventually claim that desired item."

Schwartz cautions against treating layaway as a pass to indulge in your shopping wish list as there can be fees associated with layaways, such as opening an account (though Sears is currently waiving its fees while Walmart refunds the $5 fee in a gift card).

Tips for using layaway
To ensure you get the most of the layaway option:

Read the fine print: There may be a lot of terms and conditions but read all of them before you open an account. Take note of whether you need to pay a fee to open the account, if you have to leave a down payment (and if so, how much), and how long you have to pay off the item. Also, check to see if you have to make regular monthly payments or if you can pay for the item in full at the end of the term.

Check if the time limit works for you: Some layaway terms are sixty days, some are ninety days, but however long, make sure you can pay off the full amount in that time. If not, you will not only forfeit the item but may have to pay a cancellation fee.

Avoid the credit card: The idea is to use layaway as a way to avoid additional consumer debt. There's no benefit to layaway if you put the payments on your credit card because you end up having to pay interest on top of any layaway fees. Schwartz says that the bottom line is financial responsibility. Budget so that you can pay off your layaway using cash.

The ultimate thing to keep in mind is that retailers want to sell more products, says Schwartz. It's up to the consumer to stick to their budget and ensure they're not putting themselves back into debt.

Renee Sylvestre-Williams is a writer in Toronto.

-- Posted December 10, 2012
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